There are many factors to consider when determining the best structure for your business. Choosing the proper business structure allows you to maximize tax and business benefits and can help reduce your liability. Here are the most common business structures:

 

Sole Proprietorship

 

This entity is the most common business structure because it requires no setup. Other advantages include complete control and easy termination of the business. Refer to your local and state tax authorities to determine if a business license is required. The IRS requires an Employer Identification Number if you have employees. The most significant disadvantage to a sole proprietorship is that the owner assumes full liability for potential debts and lawsuits. Creditors can access personal assets to settle liabilities even when the owner did not use these assets in the business. This business structure also has a limited ability to raise capital. The owner includes income and expenses on their personal tax return with Schedule C.

 

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Partnership

 

A partnership is when two or more people join to conduct business. Partnerships are another form of business that is easy to set up. Partnerships should refer to local and state tax authorities to determine if they must file a partnership declaration. Advantages include offsetting losses from other income and the business not paying taxes. Taxes flow through each partner’s tax return based on the ownership percentage. A written partnership agreement defines the legal interest of the partners and can describe each party’s financial contributions and responsibilities. The disadvantages are that each partner is fully liable for business debts, and the IRS requires an Employer Identification Number (EIN). Another potential disadvantage is that decision-making can be more difficult when opinions differ.

 

• Partnership
• Qualified Joint Venture
• Sole Proprietors
• Corporation
• SCorporation

 

 

Qualified Joint Venture

 

Unincorporated business whose only members are married spouses filing a joint tax return, and each spouse materially participates in the business. Qualified Joint Ventures include all the advantages and disadvantages discussed above for Sole Proprietors. A Qualified Joint Venture structure allows spouses to report earnings for social security benefits and could potentially increase their retirement benefits. However, tax planning is vital because income increases could lead to paying more in social security taxes than if just one spouse claimed the income.

 

Corporation

 

The most complex business structure, State Law determines the setup and documentation required to create it. Some key advantages include limited liability for officers, separation of personal assets from business assets to satisfy corporate liabilities, and the legal entity’s ability to live without the founder and/or key employees. Some additional advantages include the ability to raise capital, the ease of transfer of stock ownership, and the fact that fringe benefits paid to employees are tax-deductible. Disadvantages include having an Employer Identification Number (EIN), filing a tax return, and profits are subject to double taxation. Additionally, Employer taxes must be filed and paid for payments to officers, and officers must have board meetings and record the decisions made by standard business practices.

 

SCorporation

 

The small business corporation allows the complete flexibility of a sole proprietorship with the added legal protections of a corporation. Disadvantages are similar to those of a Corporation; however, a SCorporation is taxed like a partnership and, therefore, does not have the disadvantage of double taxation.

 

Professional Corporation

 

This is a corporate entity created for personal services professionals. Its advantages and disadvantages are the same as those discussed for Corporations and Corporations above.

Limited Liability Company

 

An LLC is a hybrid business structure that incorporates elements of a corporation and a partnership. The advantages of the LLC include some of the same protections of personal assets that a corporation receives without the legal requirements. To gain the protection of assets and to remove liability, limited liability companies are required to carry the appropriate insurance. Limited liability companies elect to be treated as sole proprietors/partnerships or as corporations. When choosing to be taxed as a corporation, the limited liability company will obtain an Employer Identification Number (EIN), file employment tax returns, and pay employment taxes for payments to officers of the LLC.

 

There are many options to consider before choosing a business structure. Take the time to determine what features you need and their order of importance. Do you want to start a business quickly with the option to terminate operations without hassle, or is it more important for you to secure your assets? Will it be a single member or two or more members conducting business? After determining your priorities, discuss the issue with Kostenborder Tax & Accounting to seek the best strategies for your business operations.